One of the fears of pension fund investment managers as they strive to deliver the UK government’s targets for investment into infrastructure and other large-scale private assets is that quality assets will quickly be snapped up. Exploring niches offers a solution to that challenge.

Energy infrastructure provides one such opportunity, says Christian Schwenkenbecher, chief client officer of MPC Capital, which works with institutional investors to access structural growth opportunities in the maritime and energy infrastructure markets. With the growing importance of energy security within a more de-centralised energy infrastructure, especially in Europe, there are some exciting prospects.

“Our approach to energy infrastructure investments focuses on generation assets such as onshore wind, solar PV as well as storage. We focus on structuring and securing long-term cash flows primarily through corporate offtake structures, allowing us to take an active role as a vertically integrated investor, ensuring we remain close to the underlying asset. Going forward we will be looking for additional niches across the entire value chain of energy infrastructure.”

This effectively gives the client a ringside seat, reassuringly close to the decision-making centre of the firms they are investing in, a point underlined by Schwenkenbecher. “We look for majority ownership in assets to fully exploit our active management approach. However, we also see value in partnering when skillsets are complementary, and return and performance expectations are aligned. This means we have built a track record of working successfully for and alongside institutional investment partners but also industrial partners. Combining the two is a key ingredient for performance.”

Flexible system
The focus on Europe is driven by the quality of assets, reliable political and regulatory systems and the substantial investment backlog building a new, more flexible and de-centralised energy infrastructure system. Schwenkenbecher continued; “The industrial sector in particular will increasingly depend on private capital to drive economically feasible decarbonisation. This is a compelling investment thesis for institutional investors, including private equity firms, such as KKR, Apollo and EQT, which have stepped up their investment activity, particularly in Germany, Europe’s largest economy.”

We will be looking for additional niches across the entire value chain of energy infrastructure

Schwenkenbecher explained that while MPC Capital’s target markets will remain unchanged, there seems to be a growing overseas interest from the US and the Middle East to invest in Europe. While this seems sensible considering recent political events, he sees ample investment opportunities in Europe both in the short and medium to long term, across the entire value chain, from generation to grid infrastructure to energy services.

“Energy will likely be the key bottleneck for new, rising technologies such as AI and will continue to facilitate overall GDP growth and domestic competitiveness. Ahead of these mega-trends and structural growth drivers it seems sensible to be invested along those structural trends,” Schwenkenbecher said.

While governments are looking to an expansion of nuclear power to play an important part in their longer-term plans to create national greater energy security and capacity, it does not figure prominently in MPC Capital’s strategy. “We are agnostic to overall energy sources, but our focus on renewable production capacity is mostly due to its cost competitiveness and shorter time to market compared to nuclear power,” Schwenkenbecher continued.

Robust infrastructure
The current waves of geo-political unrest sweeping around the world also create a neat intersection for MPC Capital’s core expertise in maritime and energy assets. With European governments – especially those within the NATO alliance – now committed to increasing defence spending to five percent of GDP in the next decade, he sees some of that funding major port expansions, all of which will need a robust energy infrastructure.

“Increased spending on port infrastructure and other maritime assets validates the importance of both sectors, and the focus on attractive niches is rather geared towards the intersection of maritime and energy infrastructure.” These wider macro-economic, geo-political and regulatory issues are constantly on our radar screens, says Schwenkenbecher; “We have to be sensitive to the impact of interest rate developments on transaction as well as fundraising activity. This leads us to adopt a selective approach to overall transaction activity in a still high-interest-rate environment. We will be very cautious as central banks start to ease interest rates. If continued, this trend should act as a tailwind for our transaction activities.”

He emphasised the importance of balancing transactional and management revenues, and that recurring service revenues have been a key reason for MPC Capital’s resilient business model. It has enabled the company to remain disciplined and focused on those investment strategies while ensuring high visibility of earnings growth.

Regulatory structures and policies are also a key influence when it comes to deciding which projects to commit capital to. The jolt to the world’s energy markets following the Russian invasion of Ukraine put national energy security firmly on government agendas. So far, the response in terms of impactful regulatory change has been mixed.

“The importance of sensible regulation to drive investment to accelerate the build-out of energy infrastructure cannot be under-estimated. In particular, the regulatory approaches in the UK and US have been very encouraging,” Schwenkenbecher said, while also expressing a desire for similar regulations to be enacted in Germany to attract more capital to the infrastructure sector. “Private capital will play a key role, with governments likely to provide frameworks to attract capital.”